Some 40 million Americans invest in money market accounts, which hold appeal to investors for different reasons. Some novice investors find comfort in the relative safety of placing their assets in a fund that seeks to maintain a stable share price. Indeed, many financial planners recommend that investors hold an amount equal to three to six months living expenses in a money market fund for a "rainy day." Once such investors become more accustomed to mutual fund investing, they may seek to invest in vehicles better suited for longer term goals, such as stock and bond funds.
Money market funds are also suitable for investors seeking current income. Yields on money market funds are typically higher than those offered by bank accounts. Note, however, that prevailing interest rates can decline at any time, which would cause a fund’s monthly dividend income to fall commensurately.
In some cases, investors "park" assets in a money market fund to save for a short-term goal, like a car or the down payment on a house. In this case, the principal value of the investment is preserved and the assets are readily accessible by check or bank wire.
Still others invest a portion of their investing dollars in a money market fund to offset the risk of their stock and bond fund holdings, whose share prices are subject to sharp and sudden fluctuations in value. Money market funds provide stability as part of a balanced investment program that also comprises stock and bond funds.
Finally, more sophisticated investors who trade stocks and bonds in a brokerage account typically establish money market funds. The fund facilitates trading activity by providing ready cash to buy individual securities and also serves as a repository for the proceeds from security sales. Investors invest in a money market account for a variety of reasons based on their needs.